The Days of Not Collecting Internet Sales Tax Could Be Ending

One of the many benefits of buying online is that often the seller does not collect sales tax on the transaction (unless the seller does business in the consumer’s state). In essence, it’s as if the cost of buying something is lower when no sales tax is collected, especially on big ticket items.

But some people — state tax authorities and brick-and-mortar retailers to name a few — see “no Internet tax” as just a loophole that consumers take advantage of because no one has stopped them yet. They also see it as something that gives some sellers what they consider an unfair marketplace advantage over other in-state sellers that are required to collect sales tax. Brick-and-mortar retailers have complained loudly, pointing to eCommerce behemoth Amazon.com as the prime example of what they consider having an unfair advantage.

Add to that the fact that lawmakers in states keep looking for more sources of tax revenue — and what you have is a perfect storm around this issue of collecting sales tax on Internet purchases. To help fill their tax coffers, politicians want to require all online retailers to start collect sales taxes from the states where their customers are located.

Background

Currently, online retailers collect sales tax only for states where they have a physical presence or some other “nexus” to the state. This is due to Federal court law exempting companies from having to comply with a hodgepodge of 50 different state tax laws and thousands of local tax laws, when they are selling in interstate commerce. To have to comply with thousands of tax requirements, it is said, would be unduly burdensome on retailers and have a chilling effect on interstate commerce. It would put Internet retailers at a disadvantage compared to their in-state counterparts, which have to collect taxes only for the state where the transaction took place.

This debate has been bubbling for several years. At first the battle was waged at the state level, in the form of state lawmakers passing legislation to require online sellers to remit sales tax if they had website affiliates located in their states. This often backfired. It resulted in companies ending their affiliate relationships to avoid having to collect tax in such states. Often the affiliates were small businesses and entrepreneurs who ended up as carnage in the crossfire.

Enter Washington, and the Marketplace Fairness Act

Recently, though, the Internet tax issue has bubbled up in a different place, this time at the Federal level in Washington. The proposed Marketplace Fairness Act, which is currently making its way through Congress, proposes to change things.

In fact, it appears that Amazon is behind the lobbying effort for this Act. Why? Because Amazon is building warehouses in multiple states and would have to pay tax anyway. So some believe they want to put smaller competitors at a further disadvantage.

If the Act were to pass, retailers could be required to collect taxes for states even if they have no physical presence there and receive no services from that state.

Supporters of the measure say that the Marketplace Fairness Act will simplify tax law and make collection of sales taxes easier. According to a website set up to spread the word about the Act, passage would simply allow states to enforce their existing tax laws that actually require the consumer to pay sales taxes on all purchases (rather than the seller collecting and remitting sales tax). Of course, few consumers actually report Internet transactions and pay the tax to their states.

Proponents also claim the Act would ensure minimal burden and actually make it easier for multi-state retailers to collect and remit sales tax due. They point to an online service, called TaxCloud.net, that is free for merchants and — they claim — will simplify the tax collection and reporting process across all 50 states.

Online sellers with less than $500,000 in remote sales annually will be exempt from collection requirements. Remote sales are sales to customers in states where the seller does not already have a physical presence.

Furthermore, any seller (regardless of remote sales volume) can easily rely upon completely free services available on the internet to manage all of their sales tax management needs.

However, it remains to be seen whether the small-business exemption would be retained in final passage of any act. Remember, Congress is not bound by what’s written on a website.

Also, Congress needs to gather facts about whether $500,000 is the proper level of exemption, or whether it should be higher (or lower). On the surface it sounds like a big number, but as eCommerce goes, it’s not.

Opponents Say …

Those against the Act note that it won’t stop competition from Internet retailers. Paying sales tax is just one of a long list of advantages of buying online. Other advantages are wider selection, convenience without having to fight traffic along with fast delivery to your door, and lower prices that come from the unmatched scale of giant retailers like Amazon.

Further, opponents say it is not about simplifying taxes. In reality, it adds complexity, because paying tax in 50 states is not just about 50 different laws, but there are actually 9600 taxing jurisdictions at the state and local level. Senator DeMint’s office published a rundown about flaws in the Marketplace Fairness Act.

The Marketplace Fairness Act is currently in the Senate. As usual these days, you can expect some to cloak themselves in the mantle of “helping small businesses.” However, keep this in mind: small businesses do not have one single interest in this. The interests of small businesses vary widely:

small brick-and-mortar retailers who are at a disadvantage compared to online retailers, especially large ones; versus

small online etailers who would be burdened by complying with 9600 taxing jurisdictions, and being subject to audit in potentially 50 different states.

What can you do? Be heard. Contact your Senators to let them know how this issue will impact YOUR business, so that they get all the facts.

Anita Campbell is the Founder and Publisher of Small Business Trends and has been following trends in small businesses since 2003. She is the owner of BizSugar, a social media site for small businesses, and also serves as CEO of TweakYourBiz.com.

Great post, thank you for the info. We have discussed for years about this possibility. The products we offer already have a high rate of shipping costs due to the weight. An 8%-10% tax on top of that would not be good for our business and make it very difficult to compete. In our business, the shipping costs equal close to or the same as what taxes cost through buying from a local business. Maybe if law makers would focus on reducing waste they would not have to always find ways to increase revenue.

Perhaps we should think beyond “how this issue will impact YOUR business” and think about how it would impact the economy as a whole. In general, all companies do better when the economy does.

In fact the exemption in the law mentioned above was not made due to economic sense or principles of freedom or of fairness. It was made because it was something that while deemed worthy, was just too hard to accomplish. Now, technology has made this feasible and in many cases even simple.

It levels the playing field and yes some companies who have built an advantage on the tilted field will be hurt by the change, a level playing field is generally better for the economy.

Actually, John, I think the primary responsibility of small business owners is to look out for the viability of their own businesses first. They can’t help employees and their families if they don’t stay in business.

It’s an oversimplification to say that technology makes it simple. It doesn’t take into account how many jurisdictions there are, and what happens when they start auditing your small business, and what a slippery slope it becomes when they start using the sales tax foot-in-the-door to go after other tax monies.

Whether it makes a level playing field it subject to interpretation. It depends whose ox is being gored. Whenever I see a well-oiled campaign in support of legislation, where the players behind it are not obvious, it makes me question who’s REALLY behind it — and WHY.

Subscribe

About Small Business Trends

Founded in 2003, Small Business Trends is an award-winning online publication for small business owners, entrepreneurs and the people who interact with them. It is one of the most popular independent small business publications on the web.

Together with hundreds of expert contributors, Small Business Trends brings you the news, advice and resources you need. "Small business success... delivered daily."